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China's Huge Appetite

May 19, 1996

Cover Story

CHINA'S HUGE APPETITE

As its middle class grows, so does its need for imported food and farming technology

Charles Shen, a 33-year-old Beijing resident, has become a big fan of American food and drink since he started working as an account director for a Western public-relations firm. He downs two cans of Pepsi-Cola a day. He and his colleagues plot strategy over Big Macs at McDonald's. When he takes his family out, they usually head to Pizza Hut: "It's cozy and family-like." Toss in some fried chicken from KFC and an entree or two at the Hard Rock Cafe, and Shen shells out $250 a month dining in restaurants.

Flush with new wealth, Shen and millions of other members of China's middle class are eschewing simple meals for meat-laden Chinese and Western-style food. At the same time, rapid industrialization is taking thousands of acres of agricultural land out of production. With so many rice paddies being paved over, the booming economy--projected to grow nearly 10% annually for the next decade--has far outpaced productivity in the farm sector. The result is that a nation of 1.25 billion that has long preached self-sufficiency is importing more farm commodities than ever before.

Imports are growing hand-in-hand with demand for basic ingredients like cooking oil--the stock and trade of U.S. agribusiness giants Archer Daniels Midland, Cargill, and Continental Grain. At the same time, to boost production, China is trying to attract U.S. and European merchants of seed, fertilizer, and herbicides, such as Monsanto Co. and Ciba-Geigy Ltd.

SECURITY ISSUE. No question, China would rather not import food--especially not from the U.S. Pointing out Washington's repeated threat of sanctions, Lu Mai, a fellow at the Development Research Center of the State Council, says the government worries about becoming too reliant on American food. "What if the U.S. uses this as a sanction?" he asks.

The outside world, meanwhile, is worried that China will drive up prices in international commodity markets for years to come. Chinese authorities insist the country can be selfsufficient if the weather cooperates--a big "if" in a country that recently has been plagued by droughts in some regions and floods in others.

But barring a major disaster, it's unlikely that China will end up buying the world's foodstuffs while Bangladesh starves. China's creaky infrastructure simply wouldn't allow such massive shipments of imported food. But more important, China is likely to boost its output with better fertilizer, genetics, and storage systems. Many U.S. agribusiness companies are gearing up for that effort. Since forming a joint venture with the Chinese government and the influential Kwok family of Hong Kong in late 1993, Archer Daniels Midland Co. has committed an estimated $80 million to a seven-plant processing complex in Shanghai. Continental Grain Co., first of its peers into the market 15 years ago and the most advanced U.S. player, has 25 joint ventures ranging from feed grain to poultry processing.

Beijing hopes that Western help will enable the 600 million Chinese employed in agriculture--about half of the total population--to rev up productivity and take advantage of increasing consumer affluence and changing dietary habits. That task is crucial to China's broader goal of modernizing its entire economy. "If there aren't technological advances in the countryside, the people won't get rich," says Song Guoqing, an economist at Beijing University who studies grain prices.

NERVOUS LEADERS. Part of the problem stems from neglect: Since Deng Xiaoping came to power in 1978, agriculture's share of government investment has plunged from 13% to less than 2% as the nation has focused on building basic industries and infrastructure. Deng's initial success with reform--the breakup of collective farms into small plots--boosted production as individuals took over poorly managed land. But production has since stagnated partly because mechanized farming is useless on plots the size of postage stamps.

Moreover, Beijing's uneasy hold on power makes farm policy very risky. "The government is very nervous," says a Western diplomat in China. "A lot of dynasties have been brought down because of the failure of a rice crop." Already, the sluggish performance of the agricultural sector has helped send more than 100 million peasants with little to do in the countryside flocking to the cities. The government's biggest fear is that this floating population might join in antigovernment protests with disgruntled city dwellers angered by rising inflation and unemployment.

To keep urban residents content, the government is fighting inflation by maintaining an artificially low price for grain--even though that policy is causing peasants to switch from rice, wheat, and corn to more lucrative crops such as fruits and vegetables. "It's very hard to keep farmers in the grain business," says Lu. "If they have the chance, they will switch the land to other uses."

Western agribusiness faces different problems. The narrow margins of agribusiness don't always excite Chinese partners--who can get 30% returns making sneakers, toys, and CDs. And theft of technology is an issue: "The laws aren't on the books," complains Thomas N. Urban, chairman of Pioneer Hi-Bred International Inc., who fears Chinese knockoffs of Pioneer Hi-Bred's precious seeds.

Others familiar with China have learned to accept such difficulties as part of doing business in the world's largest country. Monsanto Co. has seen its Roundup herbicide widely copied in China. But Arnold W. Donald, president of Monsanto's crop protection unit, says the company is unconcerned. "If China were really on a mission to steal, they could pirate it," Donald says. "This whole idea of protection is something of an illusion." Monsanto has announced plans for a farm-chemical plant in China.

Even so, most American companies are not as comfortable in China as Asian rivals. Thailand's CP Group--a favorite joint-venture partner--is planning to invest heavily in Chinese agribusiness. Other Asian companies run by overseas Chinese have parlayed superior knowledge of the market into impressive food businesses. Europeans have a share as well: Peter Schaetzle of Switzerland's Ciba-Geigy, which is spending $40 million to build two pesticide plants in China, says his U.S. competitors lack the patience to build a business: "The short-range, quarter-to-quarter thinking of U.S. companies makes investing in Chinese agriculture particularly unattractive," he says.

Partly because of the foreign role, China's food output should improve over time. Yields will no longer be constrained once properly balanced fertilizer and soil-testing become widespread. Improved storage and handling facilities eventually will save tons of grain that spoil today. Another potential productivity boon: genetics. Seed that is resistant to pests such as Asian corn borers could help China, but it won't arrive until intellectual-property concerns are satisfied. Farmers would also be helped if the government allowed them to buy and rent land to their hearts' content. But Beijing University's Song doesn't expect that to happen fully for at least a decade.

That means that there will probably be many more years when Chinese farmers are unable to satisfy increasing demand. Even so, over the long run, there's reason to believe that China will make progress feeding itself and that the worst-case scenarios won't explode in world markets. As foreign agribusiness makes greater inroads into China and Chinese agriculture improves, the fast food favored by Chinese such as Charles Shen will be increasingly homegrown.By Dexter Roberts in Beijing and Dave Lindorff in Guangzhou, with Greg Burns in ChicagoReturn to top